Has Wells Fargo Cracked the Code on Low Down Payments?

Wells Fargo is introducing a low-down-payment mortgage to serve as an alternative to Federal Housing Administration loans for low- to moderate-income borrowers and first-time homebuyers.

The "yourFirst Mortgage" was developed in partnership with Fannie Mae and is modeled after the low-down-payment offerings the government-sponsored enterprises introduced with limited success last year. However, the criteria for qualifying are much simpler — addressing a key disadvantage of such programs.

"The problem in this space is that it's too complex for people to figure out," said Brad Blackwell, an executive vice president and portfolio business manager at Wells Fargo. "Loan officers and real estate agents walk away from it because it's too complex and consumers don't understand it."

Blackwell estimated that Wells, the nation's largest mortgage lender, originated only 200 of Fannie's HomeReady loans during the first quarter. The new program's volume should be a lot bigger.

"We're not interested in doing a handful of loans. We're interested in making a big impact on the first-time-homebuyer market by creating a better alternative for customers," he said.

Some of that expected increase in volume will come at the expense of Wells Fargo's FHA production at a time when many lenders are scaling back their involvement in the government mortgage insurance program amid concerns that lenders are being unfairly targeted by the Department of Justice for violations of the False Claims Act.

Last fall, Wells raised its minimum credit score for FHA loans to 640, and in February it reached a $1.2 billion settlement with the Justice Department to resolve claims it originated shoddy loans under the program.

Blackwell would not say whether the recent challenges with FHA lending had any bearing on the decision to introduce the new low-down-payment program. Borrowers will be able to choose the loan program that fits their needs, he said, adding, "I think customers will find this to be a very attractive alternative to FHA."

The GSEs' initial foray into 97% loan-to-value mortgages last year was met with great fanfare but found few takers, due in large part to the programs' strict eligibility requirements. In response, Fannie's HomeReady and Freddie's Home Possible created "enhanced" low-down-payment programs designed to be easier to qualify for, but reserved for low-income borrowers or those purchasing homes in Census Bureau tracts with higher concentrations of minority populations.

Wells will not restrict eligibility for the new product with the maximum income threshold and high minority Census tract location requirements that have stymied HomeReady. Nor will it require consumers to complete a homebuyer education course to qualify for the loan. Instead, those who take such a course will get a discount on the loan rate.

"We changed the entire positioning of homebuyer education from an impediment and a reason you can't get a loan to an incentive," Blackwell said.

Features of the Wells Fargo program that mirror Fannie's HomeReady product include a minimum 620 credit score, expanded credit history reviews that include nontraditional sources like tuition and utility bill payments and consideration of income from relatives or renters who will live in the home with the borrower.

"We are committed to responsible lending practices that allow our customers to lend with more certainty and less risk," Andrew Bon Salle, executive vice president of Fannie Mae's single-family business, said in a press release.

The Wells program requires a down payment of 3% to 9.99%. It will replace three separate GSE low-down-payment mortgage options Wells offered.

"We're homogenizing the guidelines across all low-down-payment loans so you get rid of that complexity," Blackwell said. "If you know yourFirst Mortgage, you know Wells Fargo's low-down-payment program."

It is only for purchase transactions, unlike HomeReady, which offers a refinance option. Some loans will carry traditional private mortgage insurance, while other loans will have risk coverage provided by Self-Help, an affiliate of the Center for Responsible Lending.

It's the same group that partnered with Bank of America and Freddie Mac this year on another low-down-payment mortgage program. In that effort, Self-Help Federal Credit Union buys loans and servicing rights on 3% down payment mortgages originated by B of A, while its Self-Help Ventures Fund affiliate takes a first-loss position that eliminates the need for mortgage insurance.

While sharing similar goals, the Wells program is different in that it intends to sell loans originated in its program to Fannie and retain the servicing "from start to finish," Blackwell said.

The optional education course must be taught by a Department of Housing and Urban Development-approved counseling agency. Those who take it before closing will receive a 0.125% interest rate reduction for the life of the loan. On a typical $200,000 purchase transaction, that comess to about $15 a month.

While Blackwell acknowledged the lack of concrete metrics to quantify the effect of housing counseling on loan performance, the limited findings of the studies that have been conducted indicate consumers benefit from counseling (in the form of individualized consultation) and the more general homebuyer education programs used in the new Wells loan program.

"We're willing to take that leap of faith and promote it as an incentive for consumers," Blackwell said. "And we're going to create a population of consumers that will allow us to study that over time so we can better quantify it."

Fannie Mae purchases of mortgages with loan-to-value ratios from 95.01% to 97% grew from 9,000 loans from 600 lenders in the first half of 2015 to 15,000 loans from 700 lenders in the second half of the year. These high-LTV loans now make up roughly 1% of the GSE's single-family loan acquisitions.

To quantify the savings for borrowers who take the new Wells loan instead of an FHA loan, Blackwell gave the example of a $200,000 home purchase.

An FHA loan would require a $7,000 down payment and an initial loan amount of $196,400 after rolling in the upfront mortgage insurance premium of $3,400. With the new Wells Fargo program, the borrower makes a $6,000 down payment and has an initial loan balance of just $194,000.

"You basically save $3,400 right off the bat and your mortgage payments are typically going to be quite a bit lower," Blackwell said. "For someone with a 700 credit score, it would be about $70 less per month."